Starting in 2009 and until I sold my MSP, one of my core business rules was as follows: “Money Now Is Worth More Than Money Later." This was both a defining business principle and a mantra at my company and I believe it was crucial to the financial success of my business and my ability to sell my MSP when I chose to.
To many this may seem obvious, but how many are still getting paid well after the work has been done and services have been consumed by clients? In your MSP practice is this rule of business actually in place across most or even all of your client base? The traditional IT service model was to do the work, then within 1-2 weeks send an invoice and wait for payment. Of course then payment often comes weeks to sometimes months later and almost always unpredictable as to when you can expect to get paid.
Many readers will remember the Great Recession and the aftermath. As a result of uncertainty with the economy, banks and the actions the government took it was common for many businesses to delay paying invoices to other businesses in order to hold as much in funds as possible in the event the situation worsened. As a result of those times, I changed my business model dramatically and the reasons I did so still hold true today for MSP owners in terms of why it is imperative to get paid up front for the valued services you provide your clients. I sought out a different way to structure my business and make sure my business could pay its bills, pay our people and continue to grow my business.
The first rule to follow is every client needs to be on some kind of agreement, be it under a Managed Service Agreement or Pre-Paid Block Hours approach. Either way you require payment before services are rendered. Based on my experience I know it is almost always possible to get clients to pay up-front and it is necessary in the modern-day MSP world if you want to have a profitable and scalable business.
MSP owners out there all know how much they have to pay for up-front in order to provide promised services to clients. It might be contracted 3rd party tech or other services, SaaS licenses, hardware, payroll services or tech expenses. The alternative to getting paid up-front is late fees, service cut-offs and possibly even missed payrolls. Positive cash flow at the beginning of the month not only lets you get your bills paid on time but it also increases the valuation of your business. When you have funds in your accounts at the beginning of each month you avoid the spikes and falls seen in most service businesses and that differentiates your business from others. This is attractive to those who may someday buy your business and at a minimum even if you never plan to sell you will have a business that have well funded accounts with steady levels of deposits and steady balances.
I found getting clients to pay up front was easier than expected. Often it's a simple conversation with a client explaining that you have to pay for many of the services you provide them including Hosted Exchange, antivirus and backup and that you pay for these things upfront and the only way you can provide the level of service and products as promised in your managed service agreement to the client is to receive money before the month starts. When discussing this with clients comparing it to a retainer much as they would pay to an attorney works well too. If your client pays up front they will have comfort in knowing that you will be there for them when most needed.
One of the most effective ways I did this was to not only under a managed service agreement but to also do it as pre-paid blocks of hours. Every MSP has clients that just don’t fit into the format a comprehensive managed service agreement or you may just not want some on an agreement. If you have larger clients that just need tech time to supplement their IT then pre-paid is a great format. This is money up front in your pocket before the work is performed with an automatically generated next bill when available hours drop to a threshold of several hours left. The argument for this is simple; “We only provide hourly services in a pre-paid block format.”. Another effective method for well-heeled clients with the offer them an entire year of service if they would prepay and in exchange give them a month for free.
In March MSP Ignition! will host a webinar entitled “Money Now Is Worth More Than Money Later” -- going into more detail about the ways you can make sure you get paid on-time, up-front, maintain positive steady cash flow that always increases the value of your business. Please join us.
Tom Watson is director of MSP best practices at eFolder. Read more eFolder blogs here.
